Tag Archives: is the S&P 500 expensive

I’ve been reading a lot of commentary recently that maintains stocks are generally expensive. Sometimes the commentators even recommend selling, although in true Wall Street strategist style, they’re not very specific about how much to sell or how deep they think the downside risk is.

The standard argument is that if you compare the PE ratio of the S&P today with its past, the current number, just about 25x, is unusually high.

That’s correct.

What I haven’t see anyone do, however, is consider the price of stocks against the price of alternative liquid investments–cash and bonds. That would tell you what to do with the money if you sell stocks. It would also tell you that bonds are much more expensive than stocks.

The yield on the 10-year Treasury is currently 2.23%. That’s the equivalent of a PE of about 44x. The return on cash is worse. Cash, however, protects principal from capital loss, except in the most dire circumstances–ones where you’re thinking you should have bought canned goods and a cabin in the woods..

In addition, I think the most likely course for interest rates in the US is for them to rise. When this has happened in the past, bond prices have fallen while stocks have gone basically sideways. There’s no guarantee this will happen with stocks again. But rising rates are always bad news for bonds.

What is surprising to me about current market movements is that stocks continue to be so strong during a time of typical seasonal weakness.